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Hungary tries to catch logistics competition

Although the country is well located for East-West trade, there is limited logistics space in Hungary and less activity in the sector than there might be, experts say.

Hauling supplies in Audi Hungary’s logistics center, which the company built for its own use. The automotive industry has increased the need for logistics services in this country, but thus far, experts say, the sector is not living up to its potential.

With its proximity to Germany and borders with Ukraine and the Balkans, Hungary is geographically well positioned to facilitate trade between East and West. 

That situation should encourage a booming logistics business in this country, and the sector is indeed important, contributing more than 5% to Hungary’s GDP by some estimates. According to a report published by the state-run Central Statistical Office in the fall, the revenue of Hungarian logistics companies reached HUF 1.085 trillion in the second quarter of 2015.

But the domestic logistics business could be doing so much more, according to analysts. Other countries in the region are similarly well placed to facilitate East-West trade, and they have the same advantages as Hungary when it comes to affordable real estate and labor. Regional competition is fierce, especially when it comes to logistics space (see pages 14-15).

Despite this competition, though, experts say there should be more logistics activity in this country.

Desirable Budapest

According to a report published in February by Prologis and Eyefortransport entitled “Logistics Real Estate Network Expansion”, Budapest was ranked the fifth most desirable logistics center among CEE countries.

Zoltán Doór, president of the Hungarian Logistics Association, noted that manufacturers, especially carmakers, are essential to the Hungarian economy, but none of the major manufacturers are Hungarian firms. That means the foreign firms producing here must ship goods in and out of the country, so they create a demand for logistics.

“Local logistics service providers are responsible for moving and storing inventories, raw materials and parts, and the finished products derived from these, from the source of the raw materials to the end consumer,” he said. “The largest logistics demands originate from within the European Union, and within this Germany, Hungary’s largest trading partner.”

Despite steady developments and growing demand, Hungary is still trailing behind its neighbors. In early 2015, Hungary listed a total of 1,800,000 sqm in logistic-center space, while Poland had 8,800,000 sqm and Czech Republic 4,800,000 sqm, according to a report published by the Hungarian Investment Promotion Agency (HIPA) last year.

There are three challenges facing this country, according to Doór. “Firstly, operating logistics centers in Hungary is not cheap and, secondly, the main European logistics centers are situated northeast of Hungary and this situation may become permanent by 2020,” he said. “The third reason is historical: The main logistics centers were established outside of Hungary, in Bratislava, Kosice, Vienna, Arad and Temesvár.”

Many have criticized administrative burdens as weakening of the logistics sector here. For instance the EKÁER system, which tracks vehicles hauling goods and came into effect last year, and is meant to help tax authorities collect value-added taxes on imports. There have been complaints that the system poses heavy administrative burdens on companies.

But according to Doór, the negative impact that EKÁER has on the sector is negligible. “The regulation has changed significantly since its introduction, making the current burden on companies more bearable,” he said. “If we were to quantify its impact, then we could say that, depending on the type of company, the additional costs created by the regulation amount to approximately the wage of one additional employee for every HUF 2 billion in turnover.”

Improvements and in-house logistics

Critics have argued that Hungary is not as business friendly as its neighbors and that this has had a direct effect on the demand for the country’s logistics service providers, but Doór said the problem might have more to do with a lack of major developments on the Hungarian logistics market in recent years. Things are looking up, however, and a more stable regulatory environment could certainly help along the process.

“This has been a period of stabilization and for building up the sector. There has been no major breakthroughs in developments either, although two trends can be identified: One is the increase in intermodality by developer companies, such as Ekol Logistics Kft. in the Budapesti Szabadkikötő (free port) and Metrans Danubia Kft., which is also realizing a €10 million development in the same area,” Doór explained.

Intermodality refers to shifting freight from various modes of transport, such as going from ship to train, and the ability to do this smoothly and quickly is essential to effective logistics.

Along with these improvements, recent government incentives have been introduced with the aim of improving competitiveness – including support for training truck drivers, reducing administration burdens and making infrastructure investments a priority, according to reports. Doór believes that an increase in wages could go be most effective in improving competitiveness and deepening the labor pool.

For lack of a larger logistics sector in Hungary, private companies are developing their own logistics centers, with the goal of improving levels of service. MEC Group invested HUF 1 bln in the development of a pharmaceutical logistics center in Budapest, and Hell Energy Drinks company has undergone a capacity expansion at its logistics center in Szikszó, northeastern Hungary, according to Doór.

Audi has also elected to handle its own logistics needs locally.

In September, the company inaugurated a HUF 10 bln logistics center near its factory in Győr. And it’s a carbon neutral building to boot, spanning 80,000 sqm. Plans are also in the pipeline to connect the Audi logistics center by rail directly to the headquarters in Ingolstadt, Germany, according to a press release issued by the company last fall, which said that Audi currently employs rail and road in equal measure, to meet its logistics needs.

Breakdown by category

Hungary’s prime logistics mode is road traffic, which handled more than 70% of transport in 2014, according to Doór. “The reason for this large share is that road transport provides door-to-door service quite flexibly,” he said.

In fact the road network in Hungary is one of the most extensive in the European Union.

Doór estimates the share of rail transport to be about 18%, which is interesting given Hungary’s direct link to China. “Záhony and its region is the junction and reloading center for European standard-gauge railways and the wide-gauge system of the CIS states,” according to the HIPA report.

Despite excellent waterway connections with the rest of Europe, the share of water transport in Hungary is between 2% and 4%, depending on the water level of the Danube, Doór said.

Pipelines, channeling natural gas and other fuels or chemicals, account for about 10% of transport, he added.